The dangers of credit card traps
Australians love credit cards. In fact, as a nation, we love them so much that our overall credit card debt currently sits at approximately $32 billion. For each Australian credit card holder, that represents a whopping $4340!
Unfortunately, most card holders don’t realise that if they only pay the minimum repayment amount on their credit card, they will be in financial pain for years and years.
Making the minimum repayment
Indeed, many Australians would be shocked to learn that, by only making the minimum monthly repayment on an average Australian credit card debt of $4,340 at an interest rate of 15%, it could take a staggering 22 years to pay off. This assumes the repayment amount is calculated at a typical 2% of the outstanding balance.
That means over the lifetime of the loan you’d pay approx. $5,966 just in interest, with a total amount of $10,306 being repaid according to ASIC’s Money Smart credit card calculator. But it doesn’t take much to significantly reduce this figure. By giving up something as small as a takeaway coffee per day, you could shave years off the life of your loan and thousands in interest.
By saving $3.50 per day, the price of coffee, you could have $100 extra to put towards your credit card at the end of each month. While this might not seem huge this small contribution could see that $4,340 debt paid off approx.17 years faster.
Not to mention, by making additional repayments, you’d lower your interest charges from $5,966 to $1,838 over the lifetime of the loan – that’s a huge saving and definitely worth thinking over! So, given these numbers, what’s the allure of credit cards?
The allure of credit card reward programs
Australians love nothing more than a freebie and, unfortunately, in the credit card space many providers prey on that. Frequent flyer points, grocery rewards and shopping discounts are just a few of the reasons consumers spend on credit.
Many cardholders enter into an arrangement with their provider under the proviso that, by doing so, they’ll reap the rewards but that isn’t necessarily the case. In fact, new research by financial comparison website Ratecity, shows that a number of reward card programs could soon be sending many Australians backwards.
Come July 1, it’s about to get much harder for consumers to earn reward points with major changes being implemented across some of the major banks premium rewards programs. So for some cardholders this means reduced earn rates and new caps on how many points you can earn.
It’s best to think of any rewards you receive as a bonus and instead focus on choosing a credit card which prevents you paying interest so you can pay the debt off sooner!